Florida’s Insurance Regulatory Environment Earns “F” From Research Group

Along with Florida, other low-ranking states in the 2011 report include Hawaii (-22), Texas (-25), and California (-28). Florida lost points for every variable considered except market concentration for the homeowners' market and credit scoring.

Author Eli Lehrer says the organization's annual report seeks answers to two "fundamental questions" about the nation's p & c insurance regulatory environment:

1. How free are consumers to choose the p & c insurance products they want?
2. How free are insurers to provide the p & c insurance products consumers say they want?

The group scores states on that criteria in a variety of categories, including:

Politicization

Along with Michigan, Florida scored the lowest possible grade (-6) in this category. The report says that although both states have appointed rather than elected insurance commissioners, the insurance industry became "a major campaign issue" in elections.

Curiously, the author also makes special note that Florida "saw insurance involved in its race for chief financial officer."

It would be difficult for that not to occur. Florida's CFO serves on the state's Financial Service Commission, which handles the regulation of banking, securities and insurance. Additionally, the office regulates insurance agents, is court appointed as the receiver or rehabilitator of insolvent insurers, administers the workers' compensation insurance act, appoints the Insurance Consumer Advocate, and is the administrator of the division of insurance fraud.

Residual Automobile and Homeowners' Insurance Markets

Florida took its biggest hits in the property insurance market arena.

The report says that only two states—Florida and Louisiana—run "full-fledged property insurance companies as state agencies." For its auto market, Florida was dinged just one point. However, for its residual homeowners' market (the massive Citizens Property Insurance Corp.), it racked up a -10.

Evolution of Coastal Insurance Markets

Citizens—the largest property insurer in the state with over 1.3 million policies—came in for significant criticism throughout the study.

Noting successes by other coastal states in reforming their property insurance markets, the report states, "By contrast, Florida saw its property insurance market go from bad to worse. The Florida Citizens Property Insurance Corp., which had shrunk for two consecutive years, grew significantly, while several property and casualty insurers that had recently entered the market and used taxpayer subsidies to prop up their businesses collapsed and turned their books of business over to Citizens. Unlike other major insolvencies of Florida property and casualty insurers (and similar insolvencies elsewhere), these insolvencies took place in the absence of any significant loss event—the companies simply ran out of money in a storm-free year."

Rate Regulation

The report says that Citizens "guarantees lower-than-market rates for people who live in coastal areas and, as a result, tends to raise private homeowners' insurance rates in inland areas."

State-Made Rates (Prior Approval, Commissioner-Determined, Price-Controlled)

In this category, Florida stands alone. The report says, "States with 'state-made rates' use a variety of mechanisms to establish insurance rates through the political process. In the homeowners' insurance market, only one state, Florida, received this designation." The author notes that Citizens "will sell property insurance to anyone who gets a single quote even 15 percent above its prices. Thus the rates that Citizens establishes, plus 15 percent, represent a de facto state-mandated price ceiling on what people can pay for property insurance."

Florida's Office of Insurance Regulation comes under harsh criticism as well, with the report's author alleging, "Florida experienced a wave of insurer insolvencies resulting mostly from over-regulation of the market. Many insolvencies that the Florida Office of Insurance Regulation kept secret from consumers in the early months of the year ended up sending consumers and regulators scampering to other companies and the state's residual market, the Florida Citizens Property Insurance Corp."

In emailed comments about the 2011 report, Insurance Commissioner Kevin McCarty says his office "does not agree with the findings [of the report]. The claim is that Florida 'experienced a wave of insurer insolvencies in 2010, resulting mostly from over-regulation of the market.'"

Florida had a total of three insolvencies in 2010—hardly a "wave." McCarty offers commentary on those events:

1. Magnolia Insurance Co. was placed into a public administrative supervision on Dec. 14, 2009, and placed into receivership on April 30, 2010, in order to cancel its polices prior to hurricane season. The company was in the process of running off its business prior to being placed into receivership. The receiver was able to pay off all the claims against Magnolia with the company's own assets without resorting to using funds from the state guaranty fund.
2. Northern Capital Insurance Co. was placed into receivership on May 1, 2010. There are ongoing criminal prosecutions against the principals of that company for their actions that resulted in the insolvency of that company.
3. Coral Insurance Co. was placed into receivership in July 2010.  They had issues with reopened Hurricane Wilma claims resulting in under-reserving that they could not cure. They consented to receivership.

"In any marketplace, some businesses fail," McCarty says. "The insurance marketplace is no different. Regulators do not run insurance companies. In an effort to keep a company solvent while a potential buyer is looking at a troubled company and prevent the proverbial 'run on the bank,' the law provides that the OIR keep the names of troubled companies confidential until such time that all options have been exhausted to save a company," he explains. "Prematurely alerting the public of every single concern with each company's book of business would certainly cause even more strain and instability in the market.

"To accuse regulators of causing insolvencies in the marketplace is wrong," McCarty states. "In fact, the OIR proactively identified and addressed issues affecting Florida's property insurance market. These cost drivers include an explosion of sinkhole claims, reopened claims from the 2005-2005 hurricane season, rising reinsurance costs and other factors. As a result, regulators worked closely with state lawmakers to craft meaningful reforms with the passage of SB 408 during the 2011 legislative session, which the governor recently signed into law. The benefits of these reforms will be seen over time," McCarty predicts. 

Florida Insurance Council Executive Vice President Sam Miller also points to Florida's progress toward reforms made during the 2011 session. "Florida took important steps this spring to improve its troubled regulatory climate," Miller says. "These were expanded rate deregulation for commercial insurance and expanded homeowners insurance recoupment for catastrophe reinsurance costs.

"In addition, the insurance community worked with the Office of Insurance Regulation to pass SB 408 attacking sinkholes and other property insurance cost drivers," Miller continues. "This initial signal to private capital that Florida wants it to play in our market was good. We still have many regulatory hurdles to overcome, including competition with the private property market by Citizens Property Insurance Corp. and redefining the role of the Florida Hurricane Catastrophe Fund. We still have much to do."